‘Sin tax’ reform: The time is now

Last Nov. 6, Sen. Franklin Drilon, acting chair of the Senate ways and means committee, introduced on second reading an amended version of Senate Bill 3299, the sin tax bill. The measure replaced the bill that Sen. Ralph Recto, the previous committee chair, had reported out to the Senate.

The Recto bill was not well-received by the various sectors championing sin tax reform as it sought to retain the multitiered system and increase excise tax collection from tobacco and alcohol products by only P15 billion to P20 billion in the first year of implementation. This is significantly lower than the P31.35 billion that House Bill 5727, already passed on third reading, projects to raise, and an even farther cry from the P60.63-billion goal originally proposed by the Department of Finance. Senator Drilon’s substitute bill features an expected excise tax collection of P40 billion to P45 billion in the first year.

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Congress will adjourn for the holidays in six weeks, and there will be just three weeks of sessions next year before our legislators switch to campaign mode for the 2013 elections. Moreover, the Senate is also scheduled to begin deliberations on the proposed 2013 General Appropriations Act by next week. Thus, the need for the Senate to act and move the sin tax bill forward gains even greater urgency.

Certainly, the passage of the sin tax bill has the full backing of the Aquino administration, which plans to use the revenue from the revised sin tax system to advance the government’s universal health care agenda. The campaign has garnered strong public support as well, particularly from the medical and health community.

Last May, the Makati Business Club submitted its position to the House ways and means committee on the pending sin tax bill. In its statement “Tax Reform for a Healthier and Competitive Society,” the MBC said it “welcomes the initiative to reform excise taxes on tobacco and alcohol products, which would allow the government to optimize its revenue potential and create a strong disincentive for excessive tobacco and alcohol use.”

The MBC declared that it supports the shift in the excise tax system on tobacco and alcohol products from a multitiered to a unitary structure, the elimination of the price classification freeze, and the increase in excise tax rates, which will take inflation into account yearly. “The flawed tax structure governing tobacco and alcohol products has allowed the abuse of their consumption and has failed to curb the growth of new smokers and drinkers, particularly from the youth and the poor. It is society that carries the burden, as evidenced by the annual increase of economic and productivity losses tied to excessive drinking and smoking,” the MBC said.

The business cost of smoking- and drinking-related diseases is confirmed by the findings of the Executive Opinion Survey conducted by the World Economic Forum. Out of 144 economies surveyed in 2012, the Philippines ranked a poor 121st in terms of the impact on business of heart diseases, 110th in terms of the impact on business of cancer, and 129th globally and worst in Asean when it came to the impact of chronic respiratory disease.

Sin tax reforms are also necessary to achieve fiscal stability and an improved credit standing. According to Moody’s Investors Service, which upgraded the Philippines’ sovereign credit rating to a notch below investment grade last Oct. 29, “further progress in addressing the country’s key weaknesses may prompt a positive rating action,” and foremost among these is “the passage and effective implementation of structural revenue reforms.”

Various concerns have been raised about the proposed sin tax reform, including the claim that higher prices of tobacco and alcohol products will lead to increased smuggling of these items. In its statement, the MBC acknowledged that this may have some validity if prices here rise significantly above those of our neighboring countries, but said that this concern “should not deter the government from imposing correct excise tax rates, nor should this be made an excuse to nurture anti-competitive policies and practices.” It added that “strict implementation of customs laws and regulations, and effective anticorruption efforts in customs and border control, are still the key elements in winning the war against smuggling.”

Concerns regarding the sin tax bill’s negative impact on employment may be overstated. A level playing field will hopefully lead to enhanced competition that will result in better prices for Philippine tobacco, to the benefit of farmers, and possibly more efficient production that could lead to enhanced exports. We also propose that legislators earmark some of the proceeds from the increase in taxes on tobacco products to support crop diversification, retraining, and credit for affected tobacco industry farmers and workers. On the other hand, a shift in consumer spending away from tobacco and alcohol products, increased investments on account of the improved tax effort and stronger macroeconomic fundamentals, and higher public spending on healthcare services could also translate to the creation of new jobs in other industries.

We urge our Congress, starting with the Senate and followed by the bicameral committee, to take urgent and decisive action on the pending sin tax reform.